Lifetime Learning Credit: What it is and how it works

Key takeaways

• The Lifetime Learning Credit (LLC) is a tax credit that can help save you money on your income taxes when you pay for educational expenses.
• To qualify you must take classes at an eligible school and spend money on qualified expenses, as well as fit within the modified adjusted gross income (MAGI) limits.
• The LLC is worth 20% of the first $10,000 you spend on qualified education expenses. The maximum credit you can claim in a year is $2,000.
• The LLC is not refundable, so while it can reduce the amount of income taxes you owe to zero, it won’t result in a refund.
• You cannot claim both the LLC and the American Opportunity Tax Credit (AOTC) for the same student in the same tax year.

What is the Lifetime Learning Credit?

The Lifetime Learning Credit (LLC) is a tax credit that can help save you money on your income taxes when you pay for educational expenses. These include tuition and any books and supplies your school requires for enrollment and attendance, for yourself, your dependent, or your spouse.

Imagine getting a bit of a financial break just for taking a class or going back to school. That’s what the LLC offers.

Who qualifies for the Lifetime Learning Credit?

The LLC is available to a broad range of students, whether you’re taking courses to get a degree or just to improve your skills.

Here’s what you need to know

• The courses you take must be from an eligible educational institution. This includes most colleges, universities, vocational schools, and other post-secondary institutions that are eligible to participate in the Federal Student Loan program.
• The money you spend must be on qualified expenses. These typically include tuition and fees required for enrollment or attendance. Other costs, like books, supplies, and equipment, only count if they are part of your school’s condition of enrollment.
• There is no requirement to be a full-time student. You can take just one class and still qualify for the LLC. This makes it ideal for those who are working or have other commitments but want to further their education.

What is the Lifetime Learning Credit income limit?

To qualify for the LLC, your income must fall within certain limits. These limits are based on your modified adjusted gross income (MAGI), which is essentially your total income after a few adjustments and used for tax purposes.

For single filers

For married couples filing jointly

Calculating the Lifetime learning Credit

The LLC is worth 20% of the first $10,000 you spend on qualified education expenses for yourself, your spouse or your dependents. This means that the maximum credit you can claim in a year is $2,000.

How to calculate the LLC, a step-by-step guide

1. Add up your qualified expenses: Qualified expenses include tuition and fees required for enrollment. You can also include expenses for any books, supplies, and equipment required by your school.
2. Calculate 20% of your qualified expenses: Take the total amount of your qualified expenses and multiply it by 20% (.2). This will give you the amount of your LLC.
3. Apply the income limits: Remember, the amount of credit you can claim may be reduced if your MAGI is above certain limits. Refer to the income limits section to see how your MAGI affects your credit.

Here’s an example

Let’s say your MAGI is $85,000, you’re a single filer, and you spent $8,000 on qualified education expenses this year. Since your MAGI is within the phase-out range ($80,000 to $90,000), you would get a reduced credit. Here’s how you would calculate your credit.

First, calculate 20% of your qualified expenses.

$8,000×0.2=$1,600

Next, calculate your reduced credit. Subtract the lower limit of the phase-out range from your MAGI.

$85,000-$80,000=$5,000

Divide this amount by the total phase-out range.

$5,000÷$10,000=0.5

Multiply this by the initial credit amount.

$1,600×0.5=$800

Subtract this amount from the initial credit.

$1,600-$800=$800

In this example, you would receive an $800 credit after calculating the phase-out adjustment.

Claiming the Lifetime Learning Credit

Claiming the LLC can save you money on your taxes when you have education expenses. Here’s how.

1. Gather your documents, like IRS Form 1098-T, which shows the tuition and fees you paid to your educational institution, and receipts for any books, supplies, and equipment required by your school.
2. Complete IRS Form 8863, which you’ll use to calculate your education credits, including the LLC. Transfer the amount from Form 8863 to Form 1040.
3. Double-check your eligibility. Ensure you meet all criteria, such as income limits and types of expenses.
4. Submit your tax return, including Form 8863, by the filing deadline.

Navigating tax credits can be tricky, and a Tax Pro can help you avoid mistakes, ensure you’re claiming the credit correctly, and maximize your savings.

Is the Lifetime Learning Credit refundable

The LLC is not refundable. This means that while the credit can reduce the amount of tax you owe to zero, it won’t result in a refund if the credit is more than your total tax bill.

Here’s a simple way to understand it. Imagine your tax bill is $1,000, and you qualify for a $2,000 LLC. The credit will reduce your tax bill to zero, but you won’t get the remaining $1,000 back as a refund. Essentially, the LLC can lower your tax bill, but it won't put the extra credit amount in your pocket if you don’t owe any taxes.

Can I claim both the Lifetime Learning Credit and the American Opportunity Tax Credit together?

No, you cannot claim both the LLC and the American Opportunity Tax Credit (AOTC) for the same student in the same tax year. However, you can claim them for different students if you have multiple eligible students in your household.

How do you choose? The answer depends on your specific situation.

The AOTC offers a higher maximum credit ($2,500 per student) and is partially refundable, which means you could get money back even if you owe no tax. It’s available for the first four years of post-secondary education.

The LLC offers up to $2,000 per return (not per student) and is non-refundable. It covers any post-secondary education and can be used for an unlimited number of years.

Choosing between these credits can be complex, but you don’t have to file alone. Work with a Tax Pro who can help you determine which credit provides the greatest benefit for your situation, ensure you meet all the eligibility requirements, and maximize your tax savings.